The Grim Reaper of SMEs

Events of the last 11 months clearly require no summarising, but it is a hard fact that, to many small businesses in the UK, CoVid-19 has been the Grim Reaper in all but the black cloak.

However, as in all aspects of life, there have been winners and losers. Some companies have enjoyed the opportunities presented by sudden and dramatic market change, while others have been unable to cling on as their cash has gradually, but inevitably, run out.

Some companies, facing financial catastrophe, have availed themselves of the pernicious solution known as the Pre-Packaged Administration – or ‘Pre-Pack’. This is typically presented as being in the best interests of the workforce because it saves jobs and livelihoods. Many, in which we include ourselves, would decry this as a smokescreen; a diversionary tactic to move attention away from the debts which are written off and the creditors who consequently take the hit.

From the perspective of the SME creditor, this can often be worse than the debtor being allowed to go bust and into liquidation, because it invariably permits the same directors to continue to trade under the same brand, usually from the same premises, as if nothing has happened. Except something has happened. The company has abdicated from its financial obligations and, in doing so, has created a competitive advantage for itself whilst inflicting damage on the finances of those in its supply chain.

More often than not, most people don’t even notice. Apart from those directly affected by having their remuneration cancelled, so that the “administrator” can ensure its own lucrative fees are paid.

Ignoring the usual tosh that is frequently trotted out about the only person losing out is the Taxman (as if the rest of us tax-paying individuals and businesses should celebrate this!), there are usually many small companies among lengthy lists of creditors who are owed a few thousand pounds each. That is money owed in return for goods and/or services already rendered. Work has been completed, overheads have been paid for, but no recompense will be received. But never mind, because they stuck it to the man!

Over the last incomparable year, the Chancellor of the Exchequer has performed an incredible job (in the short term) magicking up an uncountable amount of dosh to ensure furloughed staff get paid, business rates and VAT get deferred, and banks have their loans (partially) underwritten. This has enabled many companies, who would probably have failed, to keep going (for a bit longer).

As we look ahead to an extended period of business recovery, we should all be aware of the companies who have made it this far but will not survive the recovery – the so-called zombie businesses. They could very well be existing customers of yours, they might already owe you money for outstanding invoices, and they could be placing new orders with you right now. In a few weeks’ or months’ time you may be regretting fulfilling those latest sales.

Now is the time to be particularly discerning between ‘profit’ and ‘cash’. A single bad debt can transform your business, especially in times as volatile as they are now, and while no one questions insuring their company’s physical assets such as stock and buildings, protection of the debtor book is regularly overlooked.

So how many of you are already employing some form of bad debt protection, and how many of you are considering options? How many of you are aware that this additional business security often comes as part of the package when you take out an invoice factoring or invoice discounting facility when, should a customer fail to pay, any loss may be absorbed by the finance provider?

And are you aware that some of these facilities are also available with CBILS support which limits directors’ guarantee requirements and, in some cases, can be bolstered with additional cash loans. But CBILS is only available for a few more weeks until the end of March, when the programme will be closed to new applicants.

For those of you new to this, bad debt protection, or credit insurance, is a mechanism whereby companies can cover themselves against the possibility of invoices not being settled by their customers, whether due to insolvency or failure to pay within an agreed credit period. Cover can be simply added to an Invoice Finance solution, whether it be a factoring or invoice discounting facility, providing additional comfort for both you and your invoice funder.

Non-payment of your invoices can have serious cashflow implications for your business, and the negative impact on income may in turn affect relationships with your own suppliers and creditors. Under most policies you (or your funder) may be entitled to claim up to 90% of the value lost through unpaid invoices.

Cover can be tailored for different risks, from work in progress to binding contracts, and aside from peace of mind and protecting your cash – because clearly, being able to collect funds you are owed is a big step in staying on top of cashflow forecasting – there are other benefits. Prospective lenders are more comfortable providing new finance, and on better terms, when a business has this cover; and you may find that your own suppliers, who know you have taken these steps to protect your business, are prepared to agree improved settlement terms.

Aside from lobbying your MP, there is very little you can do about the current corporate insolvency legislation, but there is much you can do to protect your own business from the insolvency of others. The pandemic has clearly led to huge uncertainty for businesses across many sectors, so now could be the right time to think about protecting yourself against the Grim Reaper of bad debts.

Please give us a call, or drop us a line, if you want to discuss the available options.